China’s 3-year temporary stocking policy has come to its end successfully, but the global market did not reduce its attention to China, the world’s largest cotton consumer and importer. Since the Chinese government made it clear earlier this year to try out the target price subsidy in Xinjiang, the methods and approaches to subsidy and specific how-to rules have become the focal point of market attention. Undoubtedly, what concerns foreign investors most is how to sell more foreign cotton into Chinese market under a new government policy. As this policy now remains to be seen, how would foreign dealers look at the target price policy? How would they anticipate the price trends of foreign cotton? With these questions in mind, the author interviewed several foreign dealers. 

Some foreign dealers and cotton traders generally believe that for foreign cotton to enter Chinese market in large quantities in 2014/15 it is necessary to be accustomed to Chinese cotton control measures and give consideration to the cotton prices and market acceptance in China.


1. The 19800 Yuan/t target price of standard grade cotton supports ICE cotton futures and the spot price of foreign cotton in 2014. This target price, just like 20400 Yuan/t in 2012 and 2013, might be the highest price of domestic and foreign cottons in respective years, whose role as pacemaker and driver allows for no underestimation. From the perspective of protection of farmer’s benefits, the apparent role of this target price might be as immediately effective as the government’s move to lift quantitative restrictions on stocking. If this target price corresponds to cost price of cotton processors, the benefits that farmers can reap might be higher than those in 2012 and 2013. According to the maximum agricultural subsidy cap under the WTO accession agreement, given the cotton output in Xinjiang in 2012/13, the maximum range of cotton subsidy allowed by the government’s fiscal strength is estimated at 3500-3800 Yuan/t, meaning the bottom linen of cotton subsidy allowed by the Chinese government is estimated at 16000-16300 Yuan/t, a figure that is conducive to pricing of ICE cotton futures, American cotton and cotton of other origins in 2014.    Several major foreign dealers believe that if the bottom line of the direct subsidy given by the Chinese government is around 16000 Yuan/t in 2014, the lowest point of American cotton EMOT SM would be around 85 cents/pound(customs clearance under sliding duties), if calculated on the basis of the price gap of 1000 Yuan/t between Chinese and foreign cotton, while the quoted price of SM-grade American cotton for 2014 has been adjusted to 88-89 cents/pound in June, therefore leaving a certain room for future decline in prices of ICE futures and spot prices of American cotton.  

2. Chinese government’s move to give direct subsidy to cotton growers helps narrow down the price difference between domestic and foreign cotton markets and make Chinese textile goods and clothes much more competitive in the international market. According to estimates by some institutions and agricultural departments, the market price of new cotton at home might be around 16000-17000 Yuan/t (standard grade, market price), a level much higher than the prices of cotton futures CF1501 and CF1503 at Zhengzhou Commodity Exchange (which is merely at 15400-15500 Yuan/t), although being lower than the floor price of state reserve cottons. As the price difference between Chinese and foreign cotton is expected to decrease from 2000-4000 Yuan//t in 2013/14 to around 1000 Yuan/t in 2014/15, the significantly reduced costs of raw materials for cotton-related textile companies make them more confident in thwarting the impact of imported cotton. The sufficient availability of import quota within 1% duty, cotton import quota under sliding duties and processing trade import quota allowed high-quality machine-picked American cotton, Brazilian cotton and Australian cotton to flood into Chinese market easily.




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